Chapter 13 - Background

Chapter 13 bankruptcy enables individuals with stable income to enter into a payment plan to enable them to repay all or a portion of their debts that are not considered dischargeable. Because of this facet it is also referred to as a wage earner's bankruptcy. Under this chapter of the bankruptcy code, debtors put forward a plan to repay certain creditors over a period of three or five years. In a situation where the debtor's present monthly income is lower than the state median a three year plan may be recommended, but the court may approve a five year plan if the debtor has a preference. All through the life of the chapter 13 plan you will be under the protection of bankruptcy, and the law forbids creditors from opening or continuing any debt collection efforts.

Chapter 13 - Eligibility

Even if self-employed, an individual debtor may qualify for chapter 13 bankruptcy protection. A debtor who operates an unincorporated business may also qualify to file under chapter 13. To further qualify the debtors unsecured debts will need to be below $365,000 and their secured debts are less than $1,081,400. Be aware that a corporation or partnership does not qualify for protection under chapter 13 of the bankruptcy code.

Here are some specific reasons that an individual would not qualify to file for bankruptcy protection under any chapter. If in the 180 days prior to filing the debtor has, (1) a prior bankruptcy case that was dismissed due to the debtor's willful failure to comply with orders of the court or appear before the court, or (2) their case was voluntarily dismissed by the debtor because creditors sought relief from the bankruptcy court to recover property for which they hold lawful rights.

Chapter 13 - How It Works

A chapter 13 case is opened when the debtor, in the bankruptcy court serving the area where the debtor resides, files a petition, all required schedules and documents and pays the case filing fee.  Once a case has been opened, the debtor should also be prepared to provide the chapter 13 trustee with a copy of their most recently filed tax return or transcript. During the life of the bankruptcy the debtor should also be prepared to provide any other tax returns filed during the life of the case, including all tax returns for prior years that had yet to be filed when the case was opened.

An independent trustee is appointed to administer the case any time that a chapter 13 petition is filed. As part of this role, the chapter 13 trustee is responsible for evaluating the case and acting as the disbursement agent for all monies processed as part of the case. These actions include the collection of payments from the debtor each month and distributing payouts to qualifying creditors. The act of filing the chapter 13 petition will automatically halt or “stay" most all collection activities against the debtor and their property. For so long as the stay is in effect, the vast majority of your creditors are prevented from initiating or continuing wage garnishments or lawsuits. They are even forbidden from contacting you to request payment. In response to the filing of the bankruptcy case, the clerk of the court will serve notice of the bankruptcy to all creditors that have been listed within the case.

After a chapter 13 petition is filed the trustee will schedule a meeting of creditors to take place approximately 20 to 30 after the date of filing. This meeting is also commonly known as a 341 hearing. The purpose of this meeting is to allow the trustee and creditors the opportunity to ask questions of the debtor regarding their financial situation and verify the statements made in their petition while the debtor is under oath. All debtors in any bankruptcy case are required to attend this hearing and answer honestly any questions asked of them, to the best of their ability. If married and filing jointly for bankruptcy, both debtors will be required to attend the meeting of creditors and answer any questions put before them. To ensure the objectivity of their judgment, the judge for a bankruptcy case is not allowed to attend the meeting of creditors. It is important that the debtor be sure that all the information contained in their petition and schedules are complete and accurate. This is the best possible way to avoid the discovery of issues at the creditors’ meeting.  It is essential to have complete and honest communication with your chosen attorney during the preparation of your petition as well as within the time leading up to your meeting of creditors to prevent surprises during the hearing. If an individual is seeking to save their home from foreclosure they can employ a chapter 13 proceeding to do so. The automatic stay that takes effect when the case is filed will stop the foreclosure from proceeding. The chapter 13 plan payments can further assist the debtor by helping to bring current the past-due payments over the life of the chapter 13 plan. Be advised that should the mortgage company be able to complete the foreclosure sale prior to the debtor filing the bankruptcy petition, the debtor is very unlikely to be able to save their home. If preventing is the foreclosure of your home is your primary goal, it is important to understand that in addition to filing for bankruptcy protection in a timely manner, it will be necessary that you be able to meet the monetary obligations of your regular mortgage as well as the chapter 13 plan payments once your case is filed.

Chapter 13 - Making the Plan Work

Once the bankruptcy court has confirmed your chapter 13 plan, the success or failure of the plan is primarily in the debtor’s hands. It cannot be stated strongly enough that the debtors ability to make regular, timely payments to the trustee will determine the success or failure of a chapter 13 plan. Without the approval of the trustee, a debtor will not be allowed to incur any new debts during the life of the plan. This constraint helps to ensure that any additional debts will not compromise the debtor's ability to meet their obligations under the chapter 13 plan.  And though the confirmation of the plan may entitle the debtor to retain specific assets, it does so as long as the debtor is able to remain current in the payments for these assets. If the debtor should fail to meet the requirements of the plan by not making the scheduled payments to the plan by the date they are due each month, the court will move to dismiss the case. If the debtor’s circumstances change such during the course of the chapter 13 bankruptcy that the debtor can no longer meet the obligations of the plan, they may convert their case to a chapter 7 bankruptcy.  In order to avoid unintended consequences and realize the greatest benefit , it is strongly recommended that the debtor discuss the ramifications of such a conversion with a reputable bankruptcy attorney.

Chapter 13 - The Discharge

In order to fully understand the scope of the chapter 13 discharge available to you, debtors are strongly advised to consult dependable legal counsel prior to filing.

Once they complete the chapter 13 payment plan, and so long as certain specific additional requirements have also been met, the debtor will be permitted a discharge of their debts. The debtor must also fulfill the following to qualify for the discharge of their debts; (1) debtor has not received a discharge in a prior case filed within the specified time frame of two years for prior chapter 13 cases and four years for prior chapter 7, 11 and 12 cases; (2) debtor has completed an approved course in financial management; and (3) if applicable, debtor certifies that all domestic support obligations that came due prior to making such certification have been paid.  The court will file notice and hold a hearing if satisfied, the court will then enter the discharge if it has been determined that there is no reason to believe there is any pending circumstance that could incur a limitation on the debtor's homestead exemption.

A successfully completed chapter 13 bankruptcy discharges the debtor and frees them from all debts provided for within the plan or disallowed under the bankruptcy code, with the exception of specific types of debt. The following are some examples of forms of secured debt that are not discharged in a chapter 13, such as: a mortgage, obligations for court-ordered maintenance such as alimony or child support, most taxes, most forms of government funded or guaranteed educational loans or benefit overpayments, obligations incurred through death or personal injury due to the debtor driving while intoxicated or under the influence, and restitution or a punitive fine included as part of a sentence in the debtor's conviction of a crime. To the degree that specific debts are not paid in full through the plan, the debtor should expect to still be responsible for these debts once the bankruptcy case has closed. The following types of debt will be discharged unless the creditor, in a timely manner, files and prevails in an action to have these debts declared nondischargeable; debts for money or property obtained by false pretenses, debts for fraud or defalcation while acting in a fiduciary capacity, and debts for restitution or damages awarded in a civil case for willful or malicious actions by the debtor that cause personal injury or death to a person. In a chapter 13 case the discharge of debts available is somewhat broader than those available within a chapter 7 case. Debts not dischargeable in chapter 7 but dischargeable in a chapter 13 include, debts arising from property settlements in divorce or separation proceedings, debts for willful and malicious injury to property (as opposed to a person), and debts incurred to pay nondischargeable tax obligations.